The euro zone’s 17 members are currently voting on a larger, more powerful, bailout fund: the European Financial Stability Fund. Officials want €440-billion for the kitty, with new powers to buy European government bonds and invest directly in banks. The goal is to enhance the confidence of financiers in euro zone bonds and banks – countering speculative attacks that have pushed up interest rates and shaken confidence. All members must approve the expansion, likely by mid-October.

The expansion, however, has sparked lots of public grumbling: “Why should taxpayers in countries that followed the rules bail out countries that didn’t?” This sentiment won’t stop any country from approving the expansion (Germany, the linchpin, endorsed it last week). But it will constrain politicians’ subsequent efforts to rein in the crisis.

The public’s ire, while understandable, is misdirected. It isn’t Greece and other weak states being bailed out. It’s the banks that lent money to those countries. If it were only about letting Greece default, that would have happened two years ago. It’s the feared collapse of banks in France, Germany and elsewhere – causing a credit freeze and continental depression – that officials are racing to prevent.

So German taxpayers aren’t bailing out big-spending Greeks. They’re bailing out German banks (and, more precisely, the financial investors who own those banks). Those banks created leveraged credit out of thin air, worth many times their actual capital, and lent it to Greece. They will now fail when Greece doesn’t pay it back.

So far, the euro rescue has focused on trying to assuage the owners of financial wealth, who we euphemistically call “the markets.” They’re demanding very high interest rates for loans to indebted states. But those escalating interest costs, together with the fiscal side effects of continuing recession, are making the crisis worse. And even the expanded bailout fund won’t be enough to hold back the speculative tides when the “markets” turn against the next fiscal weakling.

European officials must also reassure financiers about the creditworthiness of the banks themselves – trying to nip in the bud speculative attacks that could quickly become a full-fledged run on the banks (à la Lehman Brothers). And they want massive government money to pay for those bailouts, too.

But it’s not necessary that grumpy taxpayers need to foot the bill. The risk is that huge amounts of privately created credit might suddenly disappear – first through sovereign default and then, far more dangerously, through bank collapse. So why not just replace that disappearing private credit with new credit? That doesn’t require taxpayers to fork over anything. It simply requires policy-makers to take over management of the credit system itself.

In other words, instead of doing everything to keep private financiers happy, European officials need to replace the private debt-credit relationship with a publicly managed one. The private credit system that created all that money, and lent lots of it to Greece, will eventually be socialized, in two distinct ways.

First, the debt itself will be socialized (as the Europeans take continental responsibility for the bonds of hard-pressed member states). But, more important, the leveraged money machine that created the credit and lent it with wild abandon in the first place also will be socialized. Banks will be “recapitalized,” a euphemism for injecting hundreds of billions of euros of public capital into the banking system to offset the capital that will disappear with the coming defaults. Those new funds can be created by (public) banking, through the European Central Bank; taxpayers needn’t pay a cent. So far, Europe’s ultra-conservative finance officials reject this idea, opting, instead, for government-funded partial bailouts. They thus block the full socialization of debts that could truly solve the crisis.

Ironically, debt socialization is exactly what occurred in the U.S., albeit in a very lopsided way. Government took responsibility for massive private debts, and bailed out the private banks that created it. Some of the cost was borne (unnecessarily) by government itself. But much was financed by the Federal Reserve, which, in essence, created new money (just like private banks do every day) to keep the system afloat, through “quantitative easing.”

Inevitably, the European system must also be socialized in some form, because the private credit machine is currently untenable. We don’t need to ask taxpayers to cough up real money for bailouts – whether of heavily indebted countries or overleveraged banks. We need to find an alternative way, through public banking, to create new credit to replace the private credit now teetering on the edge of destruction. That’s a proposition that German taxpayers should celebrate.

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